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Key Takeaways
- Noncurrent assets describe a company’s long-term investments/assets that have useful lives of at least one year.
- Noncurrent assets traditionally include real estate properties, manufacturing plants, equipment, and other tangible or fixed physical items that are highly illiquid because they can’t be expeditiously sold for cash.
- In some cases, noncurrent assets also include intangible items, such as design patents and other intellectual properties.
Examples of Noncurrent Assets
Noncurrent assets such as real estate properties and manufacturing plants are tangible or fixed physical assets that cannot be easily liquidated. This is especially true with commercial real estate, where it typically takes longer than a fiscal year to close on the sale of a property. But noncurrent assets may likewise include intangible items, such as intellectual properties like design patents. Such items’ useful lives typically exceed one fiscal year and are unlikely to be liquidated within that time frame. Instead, patents take an amortization approach, where their costs are spread out over their useful lives, which can span many years–even decades.
Noncurrent Assets and Depreciation
Like amortization, depreciation is an accounting method where the cost of a tangible asset is likewise spread out over the course of its useful life. For this reason, a rule created by the International Accounting Standards Board mandates that the depreciation of a noncurrent asset is must be itemized as an expense on a company’s financial statements. As an ancillary effect, depreciation helps companies budget their resources so that they don’t have to a shell out a lump-sum of cash when they first purchase big-ticket items.
Noncurrent assets can be depreciated using the straight-line depreciation method, which subtracts the asset’s salvage value from its cost basis and divides it by the total number of years in its useful life. Thus, the depreciation expense under the straight-line basis is effectively the same for every year it is used.
Long-term investments like bonds are also deemed noncurrent assets because companies ritually hold onto these vehicles for more than a year.
Depreciation Example
Let’s consider an automobile manufacturer who purchases a machine that produces doors for its cars. The cost basis of this machine is $5 million, and the machine’s expected useful life is 15 years, after which time, the company anticipates selling that machine for $500,000. Under this scenario, the depreciation expense for the machine is $300,000 ($5 million – $500,000/15) per year. So at the end of the asset’s useful life, the machine will be accounted for using its salvage value of $500,000.